The Work of the Department - Business and Enterprise Committee Contents

Examination of Witnesses (Questions 20-39)


14 JANUARY 2009

  Q20  Mr Hoyle: We have mixed a lot up, but what we are saying is hundreds of millions is needed to ensure that we invest in modern machinery and plant in the future of Royal Mail. What we are saying is we are taking the pension fund out, that liability is going to remain with the taxpayer, in order to acquire interest from foreign companies who will take a minority stake, and I presume a minority stake is 30%?

  Lord Mandelson: I do not think you can assume anything at this stage. This is something that we need to discuss both with the possible candidates but also we will take a view and I suspect the House of Commons will take a view on what ceiling it wants to place.

  Q21  Mr Hoyle: How can you say it is a minority stake if you do not know what the minority is?

  Lord Mandelson: Because it will not go above 49.

  Q22  Mr Hoyle: So I could well be right, it could be 30%?

  Lord Mandelson: It could be. It could be 25%, it might be 33%.

  Q23  Mr Hoyle: What we are saying is we need hundreds of millions, I understand that, but can you tell us—

  Lord Mandelson: Hundreds of millions which at the moment are being drained from the revenues of the Royal Mail into—

  Q24  Mr Hoyle: It might be helpful if I finish the question rather than you prejudge it.

  Lord Mandelson: ---servicing the deficit in the pension.

  Q25  Mr Hoyle: You are having a good run, but please let me finish the question. It will be helpful to both of us because I think we both want to be constructive on how we help Royal Mail, help the British taxpayer and see how we can go forward. I agree with you that hundreds of millions are needed, but the fact is they were given a grant of £1.2 billion of which only £600 million has been spent and £600 million remains unspent within Royal Mail for modernisation.

  Lord Mandelson: Why?

  Q26  Mr Hoyle: Just bear with me. What we can say is that we have money there. The strange thing is the liability for the pension remains with the taxpayer. We have opened up the market and said ahead of everybody else in Europe, "Come to the UK and we will allow you to bid for bulk mail contracts where the profit is and we will deliver it—Royal Mail—by the Universal Service Obligation, we will deliver your mail under that access agreement". The fact is that the taxpayer is subsidising every letter that is giving money to foreign shareholders and foreign governments because we are losing on every letter we deliver under that access agreement. Surely the best way forward is to actually renegotiate the access agreement, make sure that we make a profit on every letter we deliver rather than subsidising foreign shareholders and giving them profits, in which case Royal Mail becomes profitable, and we ought to spend the £600 million they are already sitting on. If we are only talking about hundreds of millions, why do we want to give somebody 30% of the company? We have already given them the business, please do not follow that by giving them a stake in Royal Mail. Surely the answer ought to be let us make a profit on delivering other people's mail. That is the way that we can invest in Royal Mail, that is the way Royal Mail can have a future, and that ensures there is real competition in the market. The other way, of course, is to say to these foreign companies, "You also should have a Universal Service Obligation" and then we are on an equal footing. The fact is they are cherry-picking at the expense of our company and our taxpayers are subsidising it. It is unacceptable.

  Lord Mandelson: We are talking about a single minority stakeholder partner, we are not talking about a range of foreign companies.

  Q27  Mr Hoyle: One foreign company then.

  Lord Mandelson: Had it occurred to you in your analysis that should this partner be, for example, the Dutch postal operator TNT that would at a stroke, should they become the minority partner, eliminate the very competition to the Royal Mail in our market that you are taking exception to.

  Q28  Mr Hoyle: No, it would not. Well, it would do but would only take one of the competitors.

  Lord Mandelson: It is quite a big competitor.

  Q29  Mr Hoyle: It is one of the competitors. What we are saying is that Deutsche Post would still have the same access agreement and it would allow TNT and ourselves to also lose money on the delivery. It seems an absurd situation. Why do we not put the money in or spend the money we have got to modernise and charge the going rate to TNT? Why should we want to subsidise their letters?

  Lord Mandelson: What you want us to do—

  Q30  Mr Hoyle: Is not subsidise.

  Lord Mandelson: --- is to fork out taxpayers' money to invest hand over fist in the Royal Mail as we have been trying to do for the last 10 years without, as you acknowledge, success, because as you readily acknowledge £600 million of investment that the Government has made available has not been taken up for the very modernisation which is vital to the survival of the Royal Mail as a commercial concern. Something is going wrong. Something has been missing during the last 10 years, during the time we have been in government, that despite our best efforts, despite our commitment to the Royal Mail, despite all we have tried to do to invest, turn it round, raise efficiency, has not been as successful as we would have liked. I think that the missing ingredient has not only been the additional funds for investment that the Royal Mail will need increasingly in the future, not less in the future, but also difference to its management, its culture, the ethos of the company, including its industrial relations. If whilst retaining Royal Mail firmly in the public sector, as will happen, we can bring about some of those other much needed changes I think we are more likely to see that sum of money which you have described, which has so far gone wasted in investment, in modernisation of the Royal Mail, being better picked up and used for the benefit of the company, the people and the companies it is serving. Now, you might say that all the Royal Mail needs is for the liberalisation, to the extent that it has occurred, to be reversed, for the competition to Royal Mail to be withdrawn. I am not an unqualified admirer of all aspects of the regulation and liberalisation of this market, I have got my own ideas about that, but I think in the course of transferring responsibility from Postcomm to Ofcom it would be desirable to take a look and possibly make some adjustments in that. Simply to say that removing the competition alone is going to make all the difference that we want to see to the Royal Mail is, I am afraid, unsupportable.

  Q31  Mr Hoyle: That is absolutely not what I said.

  Lord Mandelson: You were nearly at that conclusion.

  Q32  Mr Hoyle: No. You are taking it completely out of context. What I am saying is, and you can play it any way you want, and I will spell it out quite clearly so we are both absolutely sure what we mean, you have competition there, that is not a problem, but what you should do is ensure that you make a profit on the delivery of your competitors' mail. What we should not be doing is using the British taxpayer to subsidise foreign companies and foreign governments. What you are saying is that we should give a stake of our company to a foreign government. I do not believe in that, I do not think it is the way forward. What I am saying is we should make a profit on the mail that we deliver for our competitors. That is how we reinvest in Royal Mail and that is how Royal Mail will have a healthy future. The only reason it went wrong was when liberalisation came in ahead of the rest of Europe and we put an access agreement in and there was an unhealthy situation where you lose money on every letter you deliver. It was an absolute nonsense to begin with, we have not addressed it since, and that is the part that needs to be addressed. Why do we not address that first and see if that works? That is the way forward, that is what I am saying. I do believe in competition.

  Lord Mandelson: There seems to be more common ground between us than I originally thought.

  Q33  Mr Hoyle: But of course, with these new Socialist principles you have brought to us since you came back I have got to be an admirer.

  Lord Mandelson: Even New Labour has to keep rethinking and modernising.

  Q34  Mr Hoyle: We are even thinking you are old Labour these days!

  Lord Mandelson: The point I am making is this: I do not know what the foreign government is that you think is being subsidised.

  Q35  Mr Hoyle: TNT and Deutsche Post both have stakes in the companies, do they not?

  Lord Mandelson: I do not think the German or Dutch Governments would see the operation of their postal operators and their relationships to our markets as subsidising those, but put that aside for one moment.

  Q36  Mr Hoyle: They get a take of the profits.

  Lord Mandelson: The reason why I think there is greater common ground between us is I happen to believe and agree that if you are going to open a market, if you are going to liberalise it and open it to greater competition, then the existing player has to be in a position to take on that competition. It has to have levels of efficiency, productivity, introduction of technology that enables it to compete with the new players who are being admitted to the market. I regret that the modernisation and increased productivity and efficiency of the Royal Mail has not gone ahead as speedily as we would have liked which would have better equipped it to take on that competition in a liberalised market, which is why I think these things have to go in tandem. We will not go in tandem or get that stronger, more efficient Royal Mail without the investment, the introduction of the technology, the reform of working practices which everyone, including the CWU, the union, accepts because they say the status quo is not an option as well. They are not dyed in the wool people who want to keep the Royal Mail as it is, they accept that change and modernisation must come about. All I am saying is we need help in bringing about that change, in my view as Hooper has argued from a minority stakeholder, another postal operator with experience and a proven track record in turning round their own postal operation and making them competitive players in the European and international markets. If you look at the Swedish or Danish experiences, but I could point to other areas, in the international postal market you need some team playing, some alliances built between postal operators. That is the trend, that is the way in which the international market is going. If we want to see Royal Mail becoming a real serious player in that international market underpinning its revenues, its profits and its commercial success then, in my view, we have got to see it teaming up with another postal operator in order to deploy that strength in the international market from its starting point and its finishing point of remaining in the public sector. That is the unchanging condition in my view because, as I have said to you, I do not think it would be easy or practical to sustain the Universal Service Obligation with a Royal Mail that had been privatised because the commercial pressures and profit-making pressures in the company would be too great to sustain the USO. That is my own view. No doubt another government of another political colour would take a different and respectable view, but it is not one I share.

  Mr Hoyle: I think you have touched on the point that we believe, and quite rightly, in the Universal Service Obligation. We believe that wherever you live in the UK your mail will be delivered and there is only one company that will do that and there is only one company that has got the USO, that is Royal Mail, therefore you start off on a different playing field, you are at a complete disadvantage. We understand why we do that and it is something we are committed to, there is not a problem in that, but in that case why do we believe that we should deliver other people's mail under the USO at a loss? Why are you not saying to me, "I'm going to renegotiate it. I'm going to make sure that they paying the going rate and that profit will go into investment"?

  Chairman: I think we are getting into a bit of a circle here.

  Q37  Mr Hoyle: Do we agree on that, that is the question?

  Lord Mandelson: I am not saying that I am not going to review it.

  Q38  Mr Hoyle: Are you saying you are going to do it then?

  Lord Mandelson: I am not saying that I am not going to look again at how the liberalisation has worked and how the regulator has performed. The regulator, Postcomm, in a sense has had two competing responsibilities. One is to uphold the USO, the six day a week delivery to every address in the country at a single price, and its other responsibility has been to introduce competition, to oversee liberalisation of the market. I think there has been a tension between those two responsibilities, those two aims, and we need to look at whether that tension has been managed in quite the ideal way we would like to see it. I certainly believe that to withstand that competition, to become a real strong player in any liberalised market, the Royal Mail has to be strengthened first. It needs to be modernised, a further introduction of changes in technology and working practices, and that is my priority, which is why I am so keen on implementing the Hooper Review recommendations as a whole.

  Q39  Mr Hoyle: I think the things we do agree on are we believe in modernisation, we believe in a strong future for Royal Mail and we believe in it making a profit for the taxpayer. We absolutely agree on those. The only thing we disagree on is how we achieve it. My way to achieve it is to stop subsidising foreign companies and those foreign companies will pay the going rate to ensure that everybody's mail is delivered, that Grandma Smith in Chorley will get her mail delivered in the way she always had and that will continue.

  Lord Mandelson: Whilst this Government is in office I can assure you Grandma Smith in Chorley will continue to receive her mail unfailingly. I am sorry, I just have to point out, Chairman, if it were as simple as Mr Hoyle suggests I think we would have achieved what he has sought to create during the last 10 years of the Labour Government, but we have not. We have not and there still remains £600 million of unspent investment—

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